Tuesday, April 02, 2013

Today's Worry is Deflation, Not Inflation

According to James Surowiecki of the New Yorker (2013, April 8):
The war-on-savers crowd makes Bernanke out to be a wild-eyed ideologue, willfully risking hyperinflation and sacrificing the well-being of retirees to his reckless schemes. But, if you look at the US economy, you don’t see any of the signs you’d expect if the Fed were acting recklessly: the money supply is not growing rapidly, and inflation is trivially low. If anything, Fed policy has been too cautious; it could have done more to rev up the economy. Sumner has argued that the Fed could have set a public target for nominal GDP and committed itself to printing as much money as needed to get there. And a new research paper from the New York Fed suggests that we should have aimed at a higher rate of inflation, which would have stimulated spending and investment by making it less attractive to just park money in the bank. Bernanke’s critics like to point to the still weak job market as evidence that the Fed’s policy hasn’t worked. It’s far more likely evidence that the Fed hasn’t gone far enough.
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Let's face it, inflation today is tame. The bigger near-term worry is deflation.

Source: Surowiecki, J (2013, April 8), Shut Up, Savers! New Yorker.

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